[Increasing Stock Debt Investment]② Devastating Returns of High-Credit Stocks with Large Price Drops

Stocks with High Credit Loan Balance Ratios Show Large Price Fluctuations, Caution Advised
Consider High Interest Burden Around 10% Even with Positive Returns

[Asia Economy Reporter Lee Seon-ae] Has the recent increase in aggressive 'debt investment (borrowing to invest)' by individual investors actually led to profits? If such aggressive investing results in gains, investors can escape the fear of forced liquidation (when securities firms forcibly sell stocks held as collateral by investors). However, the problem arises when the stock market does not perform well. When the market is sluggish, margin trading becomes a burden for investors, increasing the likelihood that they cannot avoid the risk of forced liquidation. Since margin trading involves investing with high-interest debt, investors must at least earn returns exceeding the interest costs. However, experts diagnose that with margin loan interest rates reaching as high as 10%, it is generally difficult to make profits through debt investment.

According to the Korea Exchange on the 20th, stocks with high margin loan balance ratios on the KOSPI as of the 16th were KODEX KOSDAQ150 Futures Inverse (17.25%), Samchully (12.05%), Sebang (10.71%), HanmiGlobal (9.56%), and Hyein (9.41%) in that order. The simple estimated one-month returns for these stocks were 6.16% for KODEX KOSDAQ150 Futures Inverse, 20.8% for Samchully, 26% for Sebang, -31.3% for HanmiGlobal, and -7.6% for Hyein. Except for HanmiGlobal and Hyein, the other stocks are estimated to have generated profits. However, the problem is that the opportunity cost of the high-interest rate around 10% paid when obtaining margin loans must be considered. Given the large price fluctuations, returns can vary greatly depending on the timing of purchase and sale.

On the KOSDAQ market, stocks with high margin loan balance ratios were Bigtec (11.85%), Seonkwang (11.84%), T Scientific (11.59%), Hyundai Everdigm (10.95%), and Yushin (10.7%) in that order. The one-month returns showed losses for all except Seonkwang (11.6%). Bigtec recorded -10.3%, T Scientific -5.7%, Hyundai Everdigm -10.7%, and Yushin -22.5%. Considering interest costs, the losses are estimated to be even greater.

Experts advise avoiding stocks with large margin loan balances during bear or declining markets. Stocks with high margin loan balance ratios are often highly volatile, high-risk theme stocks. Most are small- and mid-cap stocks with high trading proportions by individual investors. In addition to principal losses from market declines, increasing interest burdens can trigger a sudden surge in sell-offs. When so-called 'panic selling' occurs, these stocks tend to experience even larger price drops. Kim Min-ki, a research fellow at the Capital Market Research Institute, analyzed that "during the 2020 COVID-19 pandemic phase, stocks with high margin loan balance ratios experienced larger price declines."

The risk of forced liquidation for debt investment stocks must also be considered. In September, individual investors suffered from forced liquidations. As the index decline accelerated, record-breaking forced liquidations occurred. On September 27, the actual forced liquidation amount compared to margin trading unpaid balances was 38.274 billion KRW. The forced liquidation ratio compared to margin trading unpaid balances (226.7 billion KRW) reached 20.1%. This means one-fifth of the unpaid trading volume was forcibly liquidated. This was the largest scale so far this year and the third highest ever. During the global financial crisis on October 27, 2008, the forced liquidation ratio compared to unpaid balances was 23%, the highest ever, and on July 14 the following year, it recorded 21.8%.

This content was produced with the assistance of AI translation services.